Successful Investing

“How not to be your own worst enemy”

Over optimism

Introduction1. Optimism is ingrained in the

human psyche

2. Vast majority always look on the bright side of life

Introduction• Consider:

o 74% of 600 fund managers thought they were above average

o 70% of analysts think they are better than their peers (of the same number 91% had recommendations as buys or holds in February 2008)

o 80% of students think they will finish in the top 50% of their class

Introduction• Why?

o Tendency to overrate our abilities is amplified by the illusion of control

o We believe we can influence the outcome:

• 30 coin tosses, rigged so everyone would get 50% right

• Those who started getting the correct answers first rated themselves better than those who started off badly

o Optimism is not bad, but when we overate our abilities then it becomes hope

“Optimism may well be a great life strategy. However, hope isn’t a good investment strategy” – James Montier

Let’s see how we can beat over-optimism……

Self-servicing biasPeople will:

• Act in ways that serve their perceived self invest, i.e. “don’t ask a barber if you need a hair cut”

• Read the things that support their views and talking to those who support their view

• Delete out dissenting voices or opinions

Self-servicing bias

“But you need to kill the company”

Optimism the right way

• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks

• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down

Optimism the right way

• On average the 5 year projections of analysts for their ten best growth stories, did no better over 5 years than their 10 worst stocks

• In 4 out of the last 9 years analysts haven’t been able to predict whether a stock will be up or down

Optimism the right way

• Why?

o Focus on predication compounder

• 1) forecast economy 2) forecast interest rates 3) sector performance and 4) individual stock performance

o If you are right 70% of the time (which is high) this means even with variables you will only be right 24% of the time

Consider the right way……..

Optimism the right way

o Ben Graham

• Analysts should be penetrative

• They should understand the nature of the business

• They should try to gauge the intrinsic worth of the business

• They shouldn’t try to guess the unknowable future

Optimism the right way - summary

o To be successful we need to:

• Give up on that idea that we are investing “knowing” the future

• Focus in on what we can know

• Accept that it is better to approximately right rather than entirely wrong